IN our last article, we mentioned that customs has appointed a new head for the Post Entry Audit Group (PEAG) and that, with the reorganization of the group, we expect a better and more aggressive custom audit program resulting in the issuance of many Audit Notification Letters (ANLs) in the coming months.
In recent weeks, the PEA group has accordingly issued new sets of audit notices to numerous companies. With this development, at least 150 companies are now being audited, most of whom are multinational companies and major local trading entities belonging to the same industry (e.g. garments and textile, automotive, pharmaceutical, food, steel, consumer goods and other major importing industries).
Many customs brokers and importers are asking how they can prepare for the forthcoming customs audits. We are outlining below our understanding of the possible focus areas in a customs audit, and how customs brokers and importers can prepare for such audit.
Focus Areas for Audit. In an enforced compliance audit, customs auditors will most likely look at the following areas when conducting their field audits:
- Internal Control and Customs Declaration Process
- Record Keeping
- Tax and Duty Calculation (Freight and Insurance Costs)
- Customs Value Information
- Customs Classification and Product Description
- Inventory Control; Goods Quantity
- Licensing, Marking and Rules of Origin
- Tariff Preferences (e.g. AFTA-CEPT, AFMA)
- CBW, BOI and PEZA operations.
Internal Control and Record Keeping. Under RA 9135 and its implementing rules (e.g. CAO 4-2004), importers and customs brokers are obliged to keep records within 3 years from date of importation and failure to keep records or refusal to give customs access to these records may result in penalties to both importer or customs broker. As provided in CAO 4-2004 and related rules, the records required to be kept does not only refer to import documents but also to other business records (financial, inventory and other information) related to the correct and accurate assessment of the duties and taxes payable on the imported article.
Other than the availability and accessibility of the import and related business records, customs will verify the correct payment of duties and taxes (excise and VAT). It is not uncommon for many importers to allow customs brokers to advance the payment of taxes and duties, and in many cases, many importers have been audited by both BIR and customs on the underpayment of duties and taxes resulting from unscrupulous practices of customs brokers. As a profiling technique, customs may thus verify the duty and tax payments of an importer as against the input VAT declaration made to BIR, with focus on the discrepancy between the customs data of importation as against the data of importation in the VAT return filed.
Tax and Duty Calculation. The proper assessment of duties and taxes on an imported article is generally dependent on several factors as follows:
- transaction value (price paid or payable) and quantity
- freight and insurance costs
- duty rate based on proper classification/tariff heading
- marking duty or special duty preference
Customs audit will normally involve a review of the tax and duty calculation of a sample set of import transactions. For many companies, errors and mistakes in the calculation in any of the above factors are commonly committed due to the volume of import transaction and due to negligence in the preparation of the import declarations. These errors and mistakes in the calculation may result in a finding of underpayment.
Marking Duty and Tariff Privileges. In addition to the regular taxes (VAT and excise) and duties due on an imported article, many imported articles are subject to additional duties such as marking duties (if improperly marked), or dumping or safeguard duties. Non-payment of such duties upon importation may be uncovered during the conduct of the field audit.
In the case of companies importing articles with lower duty rates under existing free trade agreements (e.g. ASEAN FTA or ASEAN-China FTA) or in case of duty-free articles entered into PEZA or free trade zones, customs auditors may also verify if an importer has improperly claimed such duty preference and privilege. Interestingly, customs jurisdictions from other ASEAN countries have recently conducted audits on the special preferences granted on Philippines exports. Likewise, Philippine customs has in one instance reviewed the claim for such duty preference on importations from another ASEAN country.
Penalties under the PEA regime. The conduct of a customs audit may result in findings of violations of customs laws and regulations such as undervaluation, misdeclaration, misclassification, dumping or safeguard duty evasion, improper marking or country of origin declarations, or improper claim for duty preference under a free trade program or any special law. The penalties for such violations found during the audit may result in the obligation to pay the underpayment, the imposition of a penalty ranging from 50%-800% and the possible recommendation for criminal prosecution (in case of fraud).
The author is an international trade, indirect tax (customs) and supply chain expert. He is the Editorial Board Chairman of Asia Customs & Trade, an online portal on customs and trade developments affecting global trade and customs compliance in Asia. He was also Bureau of Customs Deputy Commissioner for Assessment and Operations Coordinating Group (2013-2016). For questions, please email at firstname.lastname@example.org and email@example.com